Tags: cnbc | fed | yellen | El-Erian

Former Fed Official Huszar: Central Bank Is 'Hostage to Financial Markets'

Former Fed Official Huszar: Central Bank Is 'Hostage to Financial Markets'
(Dollar Photo Club)

By    |   Tuesday, 15 September 2015 08:49 AM

The Dow dropped only 60 points on another quiet day in a market where any move less than 2% means a yawn.

The market is awaiting its own verdict on what shapes up to be a routine meeting of the FOMC and a press conference by Chair Yellen that may provide some grist for analysis.

Andrew Huszar, Senior Fellow at Rutgers Business School, who has worked on Wall Street and at the New York Fed, expresses dismay that the Fed has become “a hostage to financial markets since 2010, and the cheap funding has caused a lot of financial engineering and unproductive games in the markets.”

He explains to Kelly Evans, Mike Santoli, and Kate Kelly the process by which the Fed “has dramatically expanded its role.”

He warns that the Fed has become dependent on “unproven instruments, such as reverse repos and interest on excess reserves,” and as the Fed deals with $2.5 trillion of reserves,

“It’s going to be a wacky world.”

Elsewhere on CNBC, Mohamed El-Erian, of Allianz, advises that there has been “a change in the volatility paradigm, and what that means is that central banks are less able to repress volatility.”

This writer would suggest that the Fed has become less able to repress the volatility that it has unleashed in order to boost asset values.

El-Erian goes on to lament that commentators are “so obsessing about a single hike, and that shows how co-dependent markets and central banks have become.”

He repeats to Michelle Caruso-Cabrera his classic observation that, “We really should be looking at the journey, not the first stop, and the journey is going to be the loosest tightening in the history of the Fed.”

This writer would point out that there’s always a possibility that on any given day markets may decide to accelerate the journey on their own. This would be just part of the process of re-pricing risk and adjusting to the new volatility paradigm.

Riad Younes, of R Squared Capital Management, will be hanging on every word Yellen says or doesn’t say, and he predicts that any outlook more “hawkish” than increases of 50 basis points in each of the next two years “will cause a big correction in the equity markets.”

He listed risks the markets are processing: the Fed, bursting bubbles, high debt, and aging demographics.

Jeremy O’Friel, Managing Director, Belmont Investments, warns US equity markets have reached “a dangerous point” due to “the coincidence of what’s happening in China along with the Federal Reserve really coming to the end of the options that are available to it.

They’re painted themselves into a corner over the past three or four years.”

Look for downside volatility.

Jeremy Hill, Managing Director of Old Blackhead Companies, contends, against the weight of most commentary, that the Fed’s decision this week will be more than symbolic because “now we face the prospect of having the major central bank, the Fed, change the game (of accommodation) with its first rate hike.”

This writer would say he’s not listening, because Chair Yellen has repeatedly assured markets that whatever the Fed does will still be accommodative.

Dennis Gartman, Publisher of The Gartman Letter, explains to Melissa Lee why he has adopted a strategy short of stocks and long of bonds because of the trends these vehicles have established, ahead of what he calls “the most overhyped, overdeveloped, over-involved, most confusing meeting we’ve gone through in my lifetime.”

He expects the yield curve to flatten short-term.

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Robert-Feinberg
Mohamed El-Erian, of Allianz, advises that there has been “a change in the volatility paradigm, and what that means is that central banks are less able to repress volatility.”
cnbc, fed, yellen, El-Erian
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2015-49-15
Tuesday, 15 September 2015 08:49 AM
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